Main Players in this meeting

India @Bretton Woods

Absent from the meeting: Mohan, Montek, Pranab, and Chindu (good otherwise they’d have messed up International Economy, just like they did to Indian Economy.)

India was represented by Sir C.D. Deshmukh, he was the first Indian
Governor of RBI, This gentleman had cracked IAS exam in British-raj ,known as ICS exam in those days. And No, he is not the grandfather of Ritesh Deshmukh.

Back to the topic,

Impact of World War II on Economy

Second world war started in 1939, ended in 1945

There is large scale bombing and destruction in the world. Production has declined.

Agenda of conference

After WW2, lot of colonies will get independence (India, Sri
Lanka…), they’ll introduce their own national currencies without control
of big superpowers (Britain, France etc) and they’ll enter in
international trade in their own capacity.(Exchange rates, IMF)

Hence, Some rules/order had to be created to facilitate smooth international trade. (GATT)

Fixed Exchange Rate system.

What is Fixed Exchange Rate System?

Under this system, if RBI says $1=30 rupees, and you’ve 30 rupees
and want to convert it in dollars but the Foreigners are willing to give
1 dollar to you…don’t worry.

RBI will accept your 30 rupees and give your one dollar out of its own reserve and vice versa.

Cons are obvious : When India is not exporting enough and not
attractive enough foreign investment (in dollars) and still RBI keeps
paying people in dollars, one day the bank lockers will be empty, there
will be no dollars to pay. System will collapse.

But it has Pros (advantages) in the times of uncertainty- When
you’re writing on a clean slate, after WW2, if every nation decides to
have a fixed exchange rate system- it leads to stability and
predictability in Exchange rates = good for foreign trade.

Roosevelt Vs Mohan: Pegging the Currencies

(Fictional, technically incorrect, imaginary)President Roosevelt: ok I say we put fixed exchange
rate system. Let’s fix the rates that 40 Rupees will equal to 1 dollar.
15 Yens will equal to 1 dollar. 12 Pounds will equal to 1 dollar and so
on. In short, I’m pegging your currencies to US Dollar. Thus Dollar will
be the international reserve currency. AND Your country’s RBI (central
bank) will make sure these exchange rates don’t fluctuate more than 1%
from these values.Mohan: ya man, but what if the exchange rate
fluctuates? for example, What If I start running my country in a
totally pathetic and irresponsible manner and hence nobody wants to
invest in India so supply of dollar is low but demand of dollar is
high- because Indians love gold and we’ve to import crude oil and pay in
dollars. In short, this will fluctuate the exchange rates between
Dollar vs Rupee.President Roosevelt: Let me ask you a question.
Suppose Onions are selling 100 rupees a kilo because of low supply but
suddenly farmers produce fresh new 50 million tonnes of onions and
supply it to market, what will happen?Mohan: Easy! Onion Price will drop down to 40 rupees a kilo because the supply has increased.President Roosevelt: yes dude, the same way,
whenever exchange rate fluctuates from our standard rate, you’ll tell
your RBI to supply dollars from its own forex reserves in to the market
to calm down the demand and bring the rate back to normal level.
If the reverse happens: (Onions are selling @ 2 rupees a kilo) then you tell your RBI to buy all Onions dollars using its own rupees, until the supply is reduced and price is back to normal.Mohan: What nonsense is this? If 40 rupees equals 1
dollar but then what does 1 dollar equal to? What is the value of your
own dollar? Why should we accept your dollar as international reserve
currency?President Roosevelt: I’ve fixed the value of your
currency to my dollars. And I’m fixing the value of my own dollars to
Gold. 1 ounce of Gold shall equal to 35 dollars. Meaning you walk in
with 35 dollars in my RBI (Federal Reserve Bank of USA), and you’ll get
one ounce of gold in return. Gold will remain precious forever. So, it’s
not like we’re running the show in thin air. Dollars are backed by
GOLD.Mohan: ya man but what if my RBI doesn’t have enough dollars in its lockers? What will we do then?President Roosevelt: don’t worry, come to IMF. They’ll arrange short term loans for you, in dollars.Mohan: but still, why should we fix price of our
currency to dollars? Why should we accept dollar as the reserve currency
and not Yuan, Yen or Pound? Why should we accept you as our big boss?President Roosevelt: Because I’ve the aukaat
to pay enough gold, so I say dollars will be the international reserve
currency. IF you’ve enough gold reserve in your RBI, come sit in the
chair and we’ll see whether rupee is strong enough to become the
international reserve currency or not.
Even Britain is so financially bankrupt after Second World War, they
don’t have the guts to tell me set this exchange rate according to their
Pounds. Btw, I also got some nuke missiles in my limousine.Mohan: no no…I was just kidding man. I’m well aware that you’re the superpower both financially and militarywise.President Roosevelt: Besides When we’ve a stable and
fixed exchange system like this, it’ll ensure smooth and long term
trade deals between merchants of various countries. When you don’t have
fixed exchange rate system, it is bad for economy. For example, today
your call-center boss may give you free lunch and coffee because $1=60
rupees but next day when value of rupee declines and it is $1=50 rupees,
same boss will even stop running the water-cooler in your office. Third
day when $1=40 rupees, He will just kick you out because outsourcing
generate that much profit for him. Such uncertainty, is not good for
economy.
And since Gold is in limited supply, Dollar will be spent carefully,
and so your currency will be in spent carefully. i.e. Since currencies
are ‘pegged’, you will not indulge in extravagant spending in subsidies,
welfare schemes, tax-reliefs or debt-waivers to farmers. This ensures
fiscal discipline => That ensures less Fiscal deficit = less inflation.Mohan: Mr. President Sir, I think I got the point
now. I’ll tell my RBI Governor here to sign the Bretton Woods agreement
papers, because fixed exchange rate system sounds safe and good.

Fast forward to 1970s

As you can see, the fixed exchange rate system, is good for stable international trade environment, atleast on paper.

But this system can run smoothly only as long as USA has the aukaat to pay gold to every swinging dude that walks with dollars into their RBI (US Treasury).

Problem started with Cold War. Both USA and USSR (not Russia), are
busy in an arms race, building new tanks, missiles and submarines every
week.

They’re also giving huge donations and help to poor nations, in
order to win their support and dominate the region. This is a
non-productive activity, they’re basically wasting money.

Now, USA gets involved in a very lengthy and expensive Vietnam War from 1959 to 1975.

Inflation and Gold Prices

Fact: War leads to inflation

Fact: Inflation decreases the value of your money.

Fact: Gold becomes more expensive because of Inflation.

US still kept fixed value of 35 dollars = 1 ounce of gold. But
thanks to this inflation, Gold is trading at higher price in open market
– 40 dollars per ounce.

So there is an opportunity to make quick money, just tell the RBI
manager to take suitcase full of dollars from RBI’s locker to US Federal
Reserve, take their gold in return, and sell it to the local jeweler at
higher market price and use this profit to fix india’s problems-
poverty, education etc. (may be by starting another welfare scheme named after Nehru-Gandhi family.)

For a while, US Presidents had enough clout over international
politics so that they could force other nations’ RBI managers not to
indulge in such cheap profiteering. But Vietnam war is fast
deteriorating America’s clout and now RBIs of various countries have
started lining up with their suitcases full of dollars and they want
gold in return.

1971, President Nixon decides that if we continue giving gold for
dollars, we will go bankrupt. There will be no gold left in our lockers.
So I give up. I’m not going to let anyone exchange their dollars for my
gold.

And thus Bretton Wood system breaks down.

1973, World moves to floating exchange rate system.

What is Floating Exchange rate? Governments / Central Banks don’t
fix exchange rates here. It is left to the Forex markets, private
players and laws of supply and demand.Government /RBI will only
intervene if there is huge fluctuation in the exchange rates.

Do we need Bretton Woods?

They don’t actually mean that we need to move back to the same old
Fixed Rate exchange system, in which every currency was pegged to Dollar
and Dollar was pegged to Gold. Because that fixed rate thing is
impractical in real life scenario, as we saw in above paragraphs.

Just imagine, if tomorrow World starts running according to Bretton Woods system, what will happen?

We know that China already has more than 1000 billion dollars in its
Forex Reserves. So People’s Bank of China will send its Probationary
officer with suitcases full of dollars and take away all the gold from
Fort Knox*. They don’t even need to fight a war, USA will come down to
its knees financially.

[*Fort Knox is a place in Kentucky State, US Government keeps the gold reserves in this place.]

In real life, not that China will actually do so, but the mere
threat and possibility will keep USA on its toes. Hence US will not
agree to Fixed Exchange rate in the first place.

There is no chance any other country will agree to become the ‘big
brother’ and let their currency become the reserved currency and peg it
to gold.

Especially India, because if we peg our 10,000 Rupees to one ounce
of Gold and declare that we are the new international reserve currency,
just like dollar before 1970s, What will be the Result? Pegged currency
means Government can’t do extravagant spending in MNREGA. They’ll have
to stop subsidy on diesel, kerosene, LPG and fertilizers, because they can doll out only as much rupees as the amount of gold held in RBI’s locker.

As You can understand, no political party has the guts to do that,
hence no nation will want to become the big brother or Sacrificial goat (Bali kaa Bakraa) for “another Bretton Woods”.

So, The sentence “We need another Bretton Woods” is just a
metaphor, to say that all the Presidents, Prime ministers and Economists
of the world should meet up once again and hold conference in some
gambling den, drink some Desi liquor (देसी दारू), watch some
Item-song, brainstorm for new ideas and start something from scratch,
totally new, Just like the Gentlemen at Bretton Woods did, in 1944.

Then what to do?

It could be anything, untried and untested before like-

China could agree that we’ll not dump our products in foreign market, we will not keep our yuan under-valued,

US could agree that we’ll bring back our troop from Afghanistan
and cut down on our Defense Expenditure and its inflationary effect on
world economy. We will also stop supporting Pakistan. Thus reducing
defense Expenditure of India in the arms race= that will also reduce
fiscal deficit of India= India could decrease taxes=boost for economy
and world trade.

Iran could agree that we’ll stop our irrelevant obsession with nuke
weapons and give up, So that UN removes the sanctions and our traders
can make more money, thus improving the standard of living for Iranian
aam-aadmis.

EU could agree that we’ll kick out Greece, because it’s just way too messed up beyond fixing.

And India could agree that we’ll bring all the black money from
Switzerland and use it to finance our bogus Government schemes and
subsidies instead of looting the aam-aadmi via direct and indirect
taxes, to finance those things.

And finally you and I could agree that facebook is a waste of time,
so a serious Aspirant should concentrate on his studies instead of
uploading funny/motivational photos there.